“God Save The Canadian Dollar” by $hane Obata and Triggers
The Canadian Dollar has fallen 23% against the US Dollar since Valentine’s Day of 2013. Is the worst over? Or is there more pain to come?
The Bull Case
There are a few reasons why the CAD might rise:
- The Fed does not hike rates in 2015.
- The US economy decelerates faster than Canada’s does.
- CADUSD finds support near its March of 2009 low.
Regardless, the short thesis is more convincing…
The Bear Case
To Hike Or Not To Hike?
The market is pricing in a rate hike in just over 5 months:
As a result, near-dated yields are rising…
The Yield Curve
The Treasury yield curve is flatter than it was about a year ago:
The short-end is convinced that the Fed will move in 2015…
…The long-end is worried about slowing growth and about deflation…
The US dollar is appreciating because of rising short term rates:
This is not good for energy, metals, etc., which are priced in USD…
Dollar strength is translating into commodity weakness:
Thus, resource exporters such as Canada are under pressure…
Weak Economy, Weak CAD
Falling energy prices are negatively affecting Canada’s economy:
Industries that are not based on commodities are doing alright. But will it last???
USDCAD – Monthly Chart
USDCAD is trading at 1.30280; the highest it has been since March of 2009:
That said, it is still far away from 1.61840 (purple X); the all-time high set in January of 2002…
USDCAD – Weekly Chart
If USDCAD breaks up through trend line resistance at 1.30634 (blue X) then could rise to 1.38802 by the end of Q2, 2016:
On the other hand, if it breaks down through trend line support at 1.28313 (blue Y) then it could fall to 1.26215 by early-mid September…
There is a high probability that the CAD will continue to depreciate. In addition to everything we covered, Canada’s monetary policy is likely to remain loose. Moreover, a technical recession may lead the BOC to cut rates again this year. Finally, ask yourself one question: What will happen to the CAD if and when the Canadian housing market rolls over???
- $hane Obata (@sobata416)
Disclaimer: This analysis should not be interpreted as investment advice.